How much is an analyst really worth?
There are less than three months to go before the European Union's revised Markets in Financial Instruments Directive will require banks to disclose what they're charging for research, and the rules are expected to have global ramifications. MiFID II estimates are all over the shop, ranging from $10,000 a year for a basic package at JPMorgan Chase & Co. to $30,000 at Goldman Sachs Group Inc. Want gold star service? Barclays Plc is asking $455,000.
With the cost of research traditionally lumped in with trading, banks never had to put a price on it. Compensation was determined by an antiquated voting system (think High School Homecoming King) where asset managers put in their dibs and paid accordingly. We've approached things a little differently.
Let's start by looking at what analysts are valued for today:
The dirty little secret on Wall Street -- and why it's so difficult to price research -- is that star analysts aren't really valued for their research at all. Ask any money manager, hedge fund or research shop, and they'll tell you it's all about the contacts.
Many senior analysts spend only 10 percent of their time conducting research and writing reports. Teams of junior associates (or sometimes robots) maintain financial models and blast out notes. Some use pre-recorded voice mails to alert clients to new research.
Gadfly estimates that between 50 and 70 percent of a senior analyst's time is spent on corporate access. Things like arranging lunch with a CFO or connecting a client with a lawyer, supplier or other industry expert to delve into what the data doesn't. For this reason, analysts are often required to log the number of phone calls, meetings and events arranged each month.
The final 20 percent of an analyst's time is spent on pre-IPO research, conferences and bespoke projects, such as flying a drone over a retailer's parking lot to track how full it is; scoping the laundry outside apartment blocks; or conducting so-called channel checks to see how much oil's being pumped through a particular pipeline.
Now, let's look at what comparable companies in those three areas charge:
Access to independent research network Smartkarma starts at $7,500 a year per user for a Spotify-like subscription that opens the door to reports from more than 400 analysts. Customers can also buy additional packages of analysts' time, similar to the way lawyers or consultants get paid.
We reckon the closest approximation to corporate access is so-called expert networks, companies that maintain a stable of industry experts to match with fund managers and other financiers when they need quick access to esoteric information.
Industry leader Gerson Lehrman Group Inc. charges $100,000 a year, with the heaviest users paying millions of dollars, according to the Financial Times.
As for bespoke research projects, Morgan Stanley plans to charge $2,500 an hour for private meetings with its stock analysts, according to people with knowledge of the matter, almost twice the rate of some of the best corporate lawyers. Partners at big management consulting firms such as Deloitte LLP or McKinsey & Co. charge clients anywhere from $800 to $1,300 an hour, according to career consulting guide Rocketblocks.
A few thousand dollars might be a steal to get a trading edge from an Asian equity manager when wondering whether to sell Nissan Motor Co. or Kobe Steel Ltd. amid a surge in Japanese corporate scandals.
And for that reason, Gadfly not only recommends a tiered pricing system (one price for research, another for corporate access and a third for bespoke projects), but also the consideration of surge pricing, Uber style.
A money manager would have been willing to pay a lot more for a top real estate analyst in 2008, or a Chinese currency expert in August 2015, than now. Why not charge for their research and expertise accordingly?
Ultimately though, as the clock ticks on MiFID and more investment banks get out their calculators, an analyst's worth will boil down to one golden rule: In life, as in business, you get what you pay for.
--With assistance from Shuli Ren and Andy Mukherjee.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects attribution for Morgan Stanley plan in 12th paragraph.)
Disclaimer: We're playing by banking rules here, which means we're taking a lot of liberty and massaging the numbers as we see fit.
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Katrina Nicholas at firstname.lastname@example.org